American Apparel files for bankruptcy to cut down debts

US clothing retailer American Apparel has filed for bankruptcy protection as it attempts to shake-off its debt-pile and rebuild its reputation following a series of scandals relating to founder and former chief executive Dov Charney.

The teen-focused chain, known for overpriced jersey basics and risque advertising, said it has struck a deal with 95 per cent of its lenders that would see them write-off around $200m (£132m) of bonds in return for equity in the business.

The deal will reduce its debt mountain from around from $300m to $135m, and cuts its annual interest payments by $20m, the company said in a statement.

Chief executive Paula Schneider, who was parachuted in to the business in January, said the restructuring will allow management to focus on a turnaround of the group, including investing in new stores, designing new products and growing its online business.

"In partnership with our bondholders, we can work towards a new future for the company and concentrate on what matters: making and selling great clothing," she said.

American Apparel has been mired by years of controversy over a series of lawsuits against Charney accusing him of sexual harassment.

The company finally took action and ousted Charney in December last year for alleged misconduct, which also including misusing company funds and failing to stop a subordinate from creating blog posts that defamed former employees.

Charney’s holding in the company, currently worth some $8.2m is likely to be wiped out as a result of the bankruptcy filing, Neil Saunders, chief executive of retail research firm Conlumino said.

The Canadian has also filed several lawsuits against the company, alleging defamation, which are also likely to be delayed.

Other shareholders will also lose out. New York hedge fund Standard General holds as collateral Charney's 42 per cent stake in American Apparel. It is also the company's biggest creditor, holding $15m of debt.

Saunders said that while filing bankruptcy would help give American Apparel breathing space to turn itself around, he warned it was not, in itself, a solution to the retailer’s woes.

“Chapter 11 buys only time. Whether the company and its management use that time to solve the deep seated issues remain to be seen,” he added.

Shares in American Apparel have falling by nearly 90 per cent this year so far to 11 cents, valuing the company at around £20m.

Its latest trading update showed that sales slumped by 17 per cent in second quarter sales to $134.4m (£86m), while its net loss widened to $19.4m.